Securitisation of co-lending records could be beneficial for Non-banking financial companies as a funding route, due to potential for enhancing credit and cost savings according to CRISIL Ratings.
Such securitisations involve unique legal and operational aspects. One, as the co-lending partners hold a portion of the receivables from the underlying loans, a partner can securitise only its share in the underlying borrower payments that contractually belong to it under the co-lending agreements. Two, the securitised receivables need to be bankruptcy remote from the co-lending partners to achieve delinkage from their credit risk profiles.
Three, co-lending arrangements typically provide for the larger funding partner to step in and replace the smaller sourcing partner as the servicer of loans if the collection performance of the sourcing partner is not satisfactory, thereby providing an upfront back-up servicer option for the securitisation transaction.
Four, co-lending arrangements may involve first loss default guarantees (FLDGs) from sourcing partners to compensate the funding partner for losses due to delinquencies in the co-lending portfolio. Assignment of such FLDGs to the securitisation trust, if operationalised, could enable better transaction economics by providing loss absorption against loan delinquencies.
Says Rohit Inamdar, Senior Director, CRISIL Ratings, “The advent of securitisation of co-lent loans underscores the role of innovation in bringing more loan portfolios under the purview of the securitisation market. Securitisation can enhance transparency regarding the quality of co-lent loans, thereby boosting market confidence on the sourcing, underwriting and servicing norms governing co-lending arrangements. This can, in turn, lead to more securitisation avenues backed by co-lent loans, enhancing the potential for NBFCs to manage their liquidity by deploying funds in high-yielding co-lent loans that can be released over the short-term through securitisation.”
